Tamilnadu Electricity Board vs M/S.

Bridge Tunnel
Constructions ... on 18 February, 1997
Bench: K. Ramaswamy, S. Shaggier Hammed

JUDGMENT:
O R D E R Leave granted. Substitution allowed.

The admitted facts are that the respondents had entered into an
agreement with the appellant to construct interconnecting
tunnels for Suruliyar Hydroelectric Project as per specification
Schedule-B to the agreement. The initial value of the tender to
be awarded was Rs. 47 lakhs and it was revised to Rs. 69 lakhs
on January 16, 1975. In the course of execution of the contract, a
sum of Rs. 92 lakhs was paid to the respondent. The contract
was to be completed within a period of 24 months but was
completed in 44 months instead.
Resultantly, there had arisen a dispute as to the entitlement to
further amount towards the work done by the respondent.
On a notice issued by the respondent for appointment of an
arbitrator in terms of clause 50 of the contract (arbitrator clause),
there was a delay on the part of the appellant in nomination of
the arbitrator. When the respondent exercised the power, after
expiry of the time prescribed in the notice, appointing a sole
arbitrator, proceedings under Section 33 of the Arbitrator Act,
1940 were initiated by the appellant. One of the objections
raised by the appellant in the proceedings under Section 33 was
that under the terms of the contract the claim sought to be put up
in the notice given by the respondent was not arbitrable.
The question was gone into and the court recorded a finding as
under:
"If the petitioner had come forward to raise dispute and if it is
outside the scope of clause 50, the first respondent itself would
come forward with such a reservation. It is not as if all disputes
would come within the scope of clause 50 and only those that
would come within the ambit of clause 50 alone can be decided
by the Arbitrators. When such is the clear position on this
aspect enabling the petitioner Board to raise a objection
regarding disputes which may not come within the scope of
clause 50 it is not a concession, but a recognition of a right,
which is available not only to the petitioner Board but also the
first respondent in the event of the Board raising any dispute as
against it.

Therefore, the first stipulation is dependent upon the

Arbitrators deciding as to whether particular dispute would
come within the scope of Section 50 or not, and only if they
consider that it falls within the scope of Arbitration clause, they
would have the jurisdiction to decide the same. In the event of
the Arbitrators holding that any particular dispute is outside the
Arbitration clause, it is not as if the first respondent is deprived
of remedies by agitating the same in Court."

Pursuant thereto, condoning the delay, liberty was given to the

appellant to nominate an Arbitrator on its behalf which
accordingly was done and dispute was referred to arbitration.
Arbitrability of some of the claims was disputed as part of no
liability. Since the two Arbitrators differed, an umpire was
selected by the Arbitrators and he had gone into the question.
The relevant clauses of the Contract postulate thus :
"
22. Material to be excavated :
The character of the material through which the tunnel is to be
excavated is indicated in the report of the Geologist of the
Geological Survey of India, attached of this specification as an
appendix.
23.
The requisite tunnel is to be excavated as per the specifications.
”
Against the claims, objections were raised by the appellant.
They have disputed the claim set up by the respondents and
requested the Arbitrators to decide on the arbitrability of the
items mentioned in the claims of the respondents. The umpire,
without going into the details, in a non-speaking award as
against the claim of Rs. 2 crores 10 lakhs, has awarded a
consolidated sum of Rs. 70.83 lakhs as under :
“””””””””””””””””””””””

"I hereby award and direct as follows:

(1) The Respondent shall pay the claimant a sum of Rupees
Seventy Lakhs eighty three thousand seven hundred and ninety
three only (Rs.70,83,793/-) and release the earnest money
deposit and Bank Guarantees furnished by the claimant in lieu
of Security Deposit, in full settlement of all claims and counter-
claims."

Calling the award in question, an application to set it aside has

been filed. The respondent filed an application to make the
award the rule of the court. The civil Court dismissed the
petition of the appellant and made the award the rule of the
court. On appeal, the Division Bench of the High Court has
confirmed the same. Thus these appeals, by special leave.

“”””””””””””””””””””””””””
Shri V.R. Reddy, the learned Additional Solicitor General,
contends that the award is illegal on account of omission on the
part of the Umpire to give the findings and reasons in support
thereof of the arbitrability of the claims. He contends that
arbitrability of claim is a jurisdictional issue. The arbitrator
cannot clothe himself with the power, in a non-speaking award
to award a consolidated sum, without deciding the arbitrability
of the claims set up by the respondents including those which
are not part of the contract.
Shri Poti, learned senior counsel for the respondents has
contended that the award being a non-speaking one in the
absence of specific reference directing the Arbitrators to decide
the arbitrability of some of the items in the claims set up by the
respondent, Umpire was not called upon or obliged to decide the
dispute by a speaking order on arbitrability.
“””””””””””””””””””””””””””””””””””””””””””

In the absence of any specific reference for deciding that

dispute, even if incidentally he reaches that decision, he gets the
jurisdiction and power to decide the question, he gets the
otherwise also, the award cannot be assailed on the ground that
he reached a wrong decision without any reasons in support
thereof. In that event, it must be deemed that he had considered
the non-arbitrability of the items in a non-speaking award given
by him. He also further contends that in the absence of any
agreement between the parties that the arbitrator would give
reasons in support of his decision on the arbitrability of the
dispute, he is not called upon to decide the dispute by a speaking
award. What is required, therefore, is to be considered is
whether the arbitrator reached the decision as to the entitlement
to for a specified sum or disentitlement thereof, in his award.

Shri Poti further contends that the contract of arbitration is not

part of the record and the umpire had not referred to the
agreement as part of the award and that, therefore, it is not open
to the court to look into the contract to find out whether the
contractor claimed at the rates higher than what were contracted
and the umpire has omitted to consider the non- arbitrability of
the claims in respect of some of the items. In support thereof, the
places strong reliance on the decision of this Court in Tarapore
and Co. v. Cochin Shipyard Ltd., Cochin.

“””””””””””””””””””””””””””””””””
In view of the respective contentions, the question that arises for
consideration is: whether the Umpire was required to give a
decision supported by reasons on the non-arbitrability of some
of the items in terms of the contract.

In the light of the above facts, the question arises; whether the
arbitrator was not obliged to decide the non-arbitrability of some
of the items claimed by the respondents before/while giving a
non-speaking award and whether a deemed decision could be
given credence.
n is specifically referred to the arbitrator, the arbitrator is
required to decide the question referred to him and decide the
point on the question. Then only he gets the jurisdiction to go
into the merits. In para 12 of the judgment that point was
elaborated holding that :
"The first point extracted hereinbefore would clearly show that
the specific question about the jurisdiction of the arbitrator to
arbitrate upon the dispute set out in Point Nos. 2, 3 and 4 was
specifically referred to the arbitrator.

This ratio clearly establishes that the arbitrator gets jurisdiction

to decide the dispute on merits only when he is specifically
called upon to decide the dispute in terms of the contract.

In fact this Court had gone into merits while deciding the
question as to whether the arbitrator was justified in making the
award in excess of the jurisdiction with reference to the
arbitration agreement and deciding the dispute on that basis.
In U.P. Rajkiya Nirman Nigam Ltd. v. Indure Pvt. Ltd. [(1996) 2
SCC 667] a Bench of three judges [to which both of us were
members] had gone into the question whether the arbitrator can
go into the question whether there emerged any concluded
contract and whether he can get exclusive jurisdiction to decide
that question by himself ?
"The clear settled law thus is that the existence or validity of an
arbitration agreement shall be decided by the court alone,
Arbitrators, therefore, have no power of jurisdiction to decide
or adjudicate conclusively by themselves the question since it is
the very foundation on which the arbitrators proceed to
adjudicate the disputes."

Accordingly, it was held that the controversy of arbitrability

requires to be decided by the court and not by the arbitrator
himself.
"To constitute an arbitration agreement, there must be an
agreement that is to say the parties must be ad idem.

"An error in law on the face of the award means, in their

Lordships' view, that you can find in the award or a document
actually incorporated thereto, as for instance a note appended
by the arbitrator stating the reason for his judgment, some
legal proposition which is the basis of the award and which you
can then say is erroneous. It does not mean that if in a narrative
a reference is made to a contention of one party, that opens
the door to seeing first what the contention is, and then going
to the contract on which the parties' right depend to see if that
contention is sound. Here it is impossible to say, from what is
shown on the face of the award, what mistake the arbitrators
made. The only way that the learned judges have arrived at
finding what the mistake was is by saying:
'inasmuch as the arbitrators awarded so and so, and inasmuch
as the letter shows that the buyer rejected the cotton, the ar

The decision has been followed by this Court in all subsequent

judgments and the precise scope of the law as to error apparent
on the face of the award has been crystalised. But there is a
distinction between an error apparent on the face of the award
and jurisdictional error in passing the award. In that behalf,
in M/s. Sudarsan Trading Co. v. State of Kerala [(1989) 2 SCC
38] Justice Sabyasachi Mukharji, as he then was, had pointed
out the distinction on the jurisdictional error and the error on the
face of the award. It was stated thus:
"An award may be remitted or set aside on the ground that the
arbitrator in making it, had exceeded this jurisdiction and
evidence of matters not appearing on the face of it, will be
admitted in order to establish whether the jurisdiction had
been exceeded or not, because the nature of the dispute is
something which has to be determined outside the award-
whatever might be said about it in the award or by the
arbitrator. It has to be reiterated that an arbitrator acting
beyond his jurisdiction is a different ground from the error
apparent on the face of the award. In Halsbury's Laws of
England II, 4th edn., Vol.2 para 622 one of the misconducts
enumerated, is the decision by the arbitrator on a matter which
is not included in the agreement or reference. But in such a
case one has to determine the distinction between an error in
excess of the jurisdiction. Whether a particular amount was
liable to be paid or damages liable to be sustained, was a
decision within the competency of the arbitrator in this case. By
purporting to construe the contract the court could not take
upon itself the burden of saying that this was contrary to the
contract and, as such, beyond jurisdiction. It has to be
determined that there is a distinction between dispute as to
the jurisdiction of the arbitrator and the disputes as to in what
way that jurisdiction should be exercised. There may be a
conflict as to the power of the arbitrator to grant a particular
remedy."

In "Russel on Arbitration" [Nineteenth Edition] by Anthony

Walton, page 99, it is stated as under:
"It can, hardly be within the arbitrator's jurisdiction to decide
whether or not a precedent to his jurisdiction has been fulfilled.
It has indeed several times been said bluntly that an arbitrator
has no power to decide his own jurisdiction and in one case
where rules of an institution the arbitrator such power, the
court will ignore this when asked to enforce the award, and
decide the question itself. However, an arbitrator is always
entitled to inquire whether or not he has jurisdiction.. An
umpire faced with a dispute whether or not there was a
contract from which alone his jurisdiction, if any, can arise can
matter at all and lease the parties to go to Court, or he can
consider the matter and if he forms the view that the contract
upon which the claimant is relying and from which, if
established, alone his jurisdiction can arise is in truth the
contract, he can proceed accordingly."

In "Law of Arbitration" by R.S. Bachawat [2nd (1987) Edition]

at pages 154-55, it is stated thus:
"An arbitrator cannot by mistake assume jurisdiction over a
matter on which he has no jurisdiction. If it is shown by the
terms of the submission or by the extrinsic evidence that the
arbitrator has adjudicated upon matters outside the scope of
his authority the award cannot stand, however well meaning
and honest the mistake might have been. An arbitrator cannot
give himself jurisdiction by a wrong decision collateral to the
merits as to facts on which the limits of his jurisdiction
depends. Where it was a condition precedent to his jurisdiction
that the dispute should have arisen during a tenancy between
the plaintiff and the tenancy between the plaintiff and the
defendant or in the event of a collusion if certain works had
been completed, the arbitrator could not clothe himself with
jurisdiction by a wrong decision on the preliminary point. The
question is not preliminary point. The question is not concluded
against any party by a finding of the arbitrator that he has
jurisdiction. It is for the court and not for the arbitrator to
decide finally whether or not the arbitrator has jurisdiction and
that is the law both in India and in England."

“”””””””””””””””””””””””””””””””””””””””” 1111111
"....The question whether the matters referred were within the
ambit of the clause for reference of "any difference or dispute
which may arise between the partners is for the court to
decide". "....Dispute about the existence or validity of the
contract and as to the existence of facts which render it illegal
must be determined by the court and not by the arbitrator. The
arbitrator cannot by his own finding clothe himself with
jurisdiction. Supposing he finds that the jurisdiction agreement
is valid such a finding cannot bind the parties".

“””””””””””””””” 222222222
“”””””””””””””””1111333333777777777777
It would thus be seen that the arbitrator, while deciding the
admitted dispute, subject matter of adjudication, may decide the
dispute in reference to the agreement. That would be within his
jurisdiction. In such jurisdictional issue, even if an error is
committed that may not be an error apparent on the face of the
record because the arbitrator, the chosen forum, may commit an
error in exercising his jurisdiction. However, if he, by a
speaking award, decides it on a wrong proposition of law, it will
be an error apparent on the face of record and liable to
correction. If the arbitrator decides a dispute which is beyond
the scope of his reference or beyond the subject matter of the
reference or he makes the award disregarding the terms of
reference or the arbitration agreement or terms of the contract, it
would jurisdictional error beyond the scope of reference, he
cannot clothe himself to decide conclusively that dispute as it is
an error of jurisdiction which requires to be ultimately decided
by the court. This Court has pointed out the distinction between
latent and patent error of jurisdiction in Tarapore Co.'s case thus:
"It has to be seen whether the terms of the agreement
permitted entertainment of the claim by necessary implication.
It may be stated that we do not accept the broad contention of
Shri Nariman that whatever is not excluded specifically by the
contract can be subject-matter of claim by a contractor. Such a
proposition will mock at the terms agreed upon. Parties cannot
be allowed to depart from what they had agreed. Of course, if
something flows as a necessary concomitant to what was
agreed upon courts can assume that too as a part of the
contract between the parties."
It would thus be clear that the arbitrator cannot clothe himself
conclusively with the jurisdiction to decide or omit to decide the
arbitrability of a particular item or the claim made by the parties.
When a specific reference has been made to the arbitrator and
the parties raise the dispute of arbitrability, with the leave of the
court/by a direction of the court in a proceedings under Section
33, he is to decide the arbitrability of the dispute and make a
decision of the arbitrability of the dispute and make a decision
while giving reasons in support thereof. The decision of the
arbitrator in granting a particular sum by a non-speaking award,
therefore, hinges upon the arbitrability of a dispute arising under
the contract or upon a particular item claimed thereunder. He is
required to give the decision thereon. The question of decision
by implication does not arise since his jurisdiction to decide to
dispute on merits hinges upon his jurisdiction to decide the
arbitrability of the dispute. In this case, in view of the finding
recorded by the court, which has become final, as referred to
earlier, the arbitrator/umpire was enjoined to decide the
arbitrabilty of the claims set up by the respondent and disputed
by the appellant. Admittedly, the award of the umpire does not
contain any decision on arbitrability of the claims.
In Gujarat Water Supply and Sewerage Board v. Unique
Erectors [(1989) 1 SCC 532] one of the questions referred was
arbitrability of a particular item. It was by the Court stated thus :
"In the instant case, the arbitrator by virtue of the terms
mentioned in the order of this court had to decide which of the
disputes were arbitrable and which were not. It is true that the
arbitrator has not specifically stated in the award that he had to
decide the question of arbitrability. The arbitrator has rested by
stating that he had heard the parties on the point of arbitrability
of the claim and the counter-claim. He has further stated that
after 'considering all the above aspects' and 'the question of
arbitrability or non-arbitrability' he had made the award on
certain aspects."

It could be seen that if the arbitrator has indicated his mind in

the award that he in fact adverted to the arbitrability or non-
arbitrability of the claim and then made the award, it would be
indicative of the fact that he had, in fact, applied his mind,
considered that question and reached the decision in awarding
certain amounts by a non-speaking award including the claim in
respect of which arbitrability was in issue.
In Raipur Development Authority v. Chokhamal
Contractors [(1989) 2 SCC 721], a Constitution Bench of this
Court had gone into the question whether the arbitrator is
required to give reasons in a non-speaking award. The
Constitution Bench had pointed out in para 35 thus:
"We do not appreciate the contention, urged on behalf of the
parties who contend that it should be made obligatory on the
part of the arbitrator to give reason for the award, that there is no
justification to leave the small area covered by the law of
arbitration out of the general rule that the decision of every
judicial and quasi-judicial body should be supported by reasons.
But at the same time it has to be borne in mind that what applies
generally to settlement of disputes by authorities governed by
public law need not be extended to all cases arising under
private law such as those arising under the law of arbitration
which is intended for settlement of private disputes."
In para 37 thereof, this Court emphasised the need to make a
speaking award and the terms in the contract should postulate
such a need when the contract is entered into by the State or its
instrumentalities. It was held thus:
"The trappings of a body which discharges judicial functions
and is required to act in accordance with law with their
concomitant obligations for reasoned decisions, are not
attracted to a private adjudication of the nature of arbitration
as the latter, as we have noticed earlier, is not supposed to
exert the State's sovereign judicial power. But arbitral awards in
disputes to which the State and its instrumentalities are parties
affect public interest and the matter of the manner in which
government and its instrumentalities allow their interest to be
affected by such arbitral adjudications involve larger questions
of policy and public interest. Government and its
instrumentalities cannot simply allow large financial interests of
the State to be prejudicially affected by non-reviewable -
except in the limited way allowed by the statute - non-speaking
arbitral awards. Indeed, this branch of the system of dispute
resolution has, of late, acquired a certain degree of notoriety by
the manner in which in many cases the financial interests of
government have come to suffer by awards which have raised
eyebrows by doubts as to their rectitude and property. It will
not be justifiable for governments or their instrumentalities to
enter into arbitration agreements which do not expressly
stipulate the rendering of reasoned and speaking awards.
Government and their, instrumentalities should, as a matter of
policy and public interest- if not as a compulsion of law ensure
that wherever they enter into agreements for resolution of
disputes by resort to private arbitrations, the requirement of
speaking awards is expressly stipulated and ensured."

“””””””””””””””””””****88888888888

In State of A.P. & Ors. v. R.V. Rayanim & Ors. [(1990) 1 SCC
433], relied on by Shri Poti, the question arose whether the
award of escalation charges in a non-speaking award is vitiated
by any error apparent on the face of the record? Therein the
question of jurisdictional issue had not arisen. On the other
hand, on merits, it was contended that there was an error in that
behalf. In para 5 it was held that " it was then contended, that the
award has purported to grant damages on the basis of escalation
of cost and prices and such escalation was not a matter within
the domain of the bargain between the parties and having taken
that factor into consideration the award was bad." Therefore, the
ratio there is an authority supporting the contention on the need
of an arbitrator to give a reasoned decision on arbitrability of the
contract or claim in dispute.
In this regard, Section 31(3) of the Arbitration and Conciliation
Act, 1996, provides thus:
"(3) The arbitral award shall state the reasons upon which it is
based, unless-
(a) the parties have agreed that no reasons are to be given, or
(b) the award is an arbitral award on agreed terms under
Section 30."

The Parliament has expressed the legislative judgment that the

award shall state reasons upon which it is based unless parties
have agreed otherwise or the award is covered on agreed terms
under Section 30 of the new Act.
Thus, the law on the award, as governed by the new Act, is other
way about of the pre-existing law; it mandates that the award
should state the reasons upon which it is based. In other words,
unless (a) the parties have agreed that no reasons are to be given
or (b) the award is an arbitral award on agreed terms
under Section 30 of the new Act, the award should state the
reasons in support of determination of the liability/non-liability.
Thereby, legislature has not accepted the ratio of the
Constitution Bench in the Chokhamal Contractor's case that the
award, being in the private law field, need not be a speaking
award even where the award relates to the contact of private
parties or between person and the Government or public sector
undertakings. The principle is the same, namely the award is
governed by Section 31(3).
We have set out the relevant portions of the award. From a
reading thereof, it is clear that the arbitrator had considered the
claims made on the basis of escalation and damages, in a non-
speaking award of the disputes consisting of arbitrable and non-
arbitrable claims. He awarded a lumpsum amount of Rs.
70,83,793/-. It is difficult to discern as to what extent the umpire
had considered the admissible and inadmissible claims which he
adjudged. In such a situation, it is not possible to discern to what
extent he had exercised his jurisdiction vis-a-vis of the
admissible claims and disallowed the non-arbitrable claims. So,
it is not clear whether he exercised his authority either beyond
his jurisdiction or in abdication thereof. In either case, it is an
error of jurisdiction, the very foundation for his decision.
It is well settled that in the matter of challenge to the award
there are two distinct and different grounds, viz., that there is an
error apparent on the face of the record and that the arbitrator
has exceeded his jurisdiction. In the latter case, the court can
look into the arbitration agreement but under the former it
cannot do so unless agreement but under the former it cannot do
so unless the agreement was incorporated or cited in the award
or evidence was made part of the agreement. In the case of
jurisdictional error, there is no embargo on the power of the
court to admit the contract into evidence and to consider whether
or not the umpire had exceeded the jurisdiction because the
nature of the dispute is something which has to be determined,
outside the award, whatever might be said about it in the award
or by the arbitrator. In the case of non-speaking award, it is not
open to the court to go into the merits. Only in a speaking award
the court can look into the reasoning in the award and correct
wrong proposition of law or error of law. It is not open to the
court to probe the mental process of the arbitrator and speculate,
when no reasons have been given by the arbitrator, as to what
impelled the arbitrator to arrive at his conclusion. But in the later
case the court, with reference to the terms of the
contract/arbitrator/umpire has exceeded his jurisdiction in
awarding or refusing to award the sum of money awarded or
omitted a consolidated lumpsum.
In fact, in G.S. Atwal & Co.'s case, having noticed that the
arbitrator had exceeded his jurisdiction to grant amount de hors
the terms of the contract and being a non-speaking award, the
court was unable to speculate as to what extent the award was
within the terms of the contract or claims made and to what
extent the amount awarded was in respect of non-arbitrable
dispute. Accordingly, the order of the civil court was set aside
reversing the judgment of the Division Bench of the Calcutta
High Court.
Thus considered, we hold that the arbitrator, having been
invested with the jurisdiction to decide the arbitrability of
certain claims, has committed error of jurisdiction in not
considering the arbitrability of the claims and passed a non-
speaking award, awarding a sum of Rs. 70.83 lakhs and odd. It
is difficult to ascertain as to what extent he has awarded the
claims within the contract or the claims outside the contract, of a
total claim of Rs. 2.10 crores. Under those circumstances, we are
constrained to hold that it is difficult to give acceptance to the
award made by the umpire as upheld by the courts below.
Equally, we find it difficult to accept the contention that out of a
claim of Rs. 2.10 crores, only a sum of Rs. 70.83 and odd was
awarded. So, it is not a fit case for interference on the basis of
the mere fact that a lesser sum than was claimed has been
awarded. An illegal award cannot be upheld to be valid or within
jurisdiction.
The question then is : what procedure should be adopted in this
behalf? The contention of Shri Poti is that it may be remitted to
the umpire for fresh consideration. On the other hand, the
contention of Shri V.R. Reddy is that in the event of the
conclusion that the arbitrator has exceeded his jurisdiction, the
entire award would become invalid and it has to be set at naught.
Having given due consideration to the respective contentions,
we find force in the contention of Mr. V.R. Reddy. Mr. Poti has
stated that though it is found that the award is not valid in law,
the party cannot be made to suffer on account of the illegality
committed by the umpire. We find no force in the contention.
Once a finding recorded that the umpire/arbitrator has
committed error of jurisdiction, as stated earlier, two course are
open, viz., either to remit the award to the umpire for
reconsideration or to set aside the award in toto. We think that
the latter course would be appropriate in the facts and
circumstances in this case.
Accordingly, we allow the appeals set aside the award of the
arbitrator and leave the parties to bear their own costs. If there
are no outstanding dues recoverable from the respondents, the
security deposit and bank guarantee is required to be refunded to
the respondent.